More and more consumer goods are proudly displaying the "fair trade" moniker. Shops are now proudly presenting the fair-trade brand in catalogues, shopfronts and websites.
It's branded on clothes, chocolate, soccer balls and its most prominent vanguard, coffee. In the United States, Wal-Mart -- regularly attacked by self-anointed "progressives" for its sale of cheap free-trade imports -- has started stocking fair-trade coffee. Starbucks has been doing so for years. McDonald's recently announced it is now following suit. Fair trade has become the new chic brand to appease Western consumer guilt.
Critics claim unregulated free trade undermines labour standards, ensures cheap wages and delivers little to anyone but big multinational corporations. They argue that laissez-faire trade is essentially tipped in favour of the rich, against the poor.
In opposition, the fair-trade campaign aims to create a level playing field that tips the rules of the game in favour of the poor, through stabilised wages, prices and profits to producers and workers. Marketed as a means for consumers to "satisfy their palate and their conscience at the same time", it is a wildly distorted campaign of misdiagnosis and misrepresentation.
Certainly consumers are welcome to purchase "social justice" with their morning latte. But rather than aiding development, the fair-trade coffee campaign implicitly promotes a return to the managed trade system in coffee that has hindered coffee-producing developing nations since the 1960s.
The fair-trade campaign aims to manage the international coffee trade by fixing prices at $US1.26 ($1.64) per pound and eventually fixing supply. In doing so, it is similar to the former International Coffee Agreement established in 1963. The ICA was developed by a UN agency, the International Coffee Organisation, to manage trade for developing countries and provide an industry to grow a product that could be exported to rich countries. The ICA stabilised prices through quotas and controlled supply. When there was an excess of supply, surplus coffee was destroyed or withheld to ensure the price never fell. The result was endemic corruption as dictators in developing countries doled out coffee-growing licences to mates or the highest bidder.
In 1989 the ICA collapsed with the end of the Cold War and so did its controls. Coffee production exploded as opportunities for individuals and countries previously locked out established production. Brazil alone doubled its output. New countries entered the market, including Vietnam, which increased its production tenfold. Textbook economics applied then as now -- when supply outstripped demand, prices plummeted. By 1992 coffee futures had bottomed and supply had massively outgrown demand.
Concurrent to the bottoming of the market, consumer consumption of coffee went through a renaissance, particularly in the United States. The exemplar of the trend is the now common international trademark, Starbucks. Starbucks changed coffee consumption in the world's largest economy from a standard "cup of joe" to a personalised coffee experience; and they paid a premium for it. While consumer prices rose for soy-macchiatos, little of the benefit flowed to producers in developing countries.
Critics cited the high consumer prices coupled with the bottoming of the market wholesale price as evidence of the failure of the free market. To lift prices for developing countries NGOs proposed a repackaged form of the old managed-trade system -- fair trade.
In an influential 2002 report, Mugged: Poverty in your coffee cup, Oxfam International dubbed the lowered prices as a "coffee crisis". Yet, comparing current low prices against old ICA prices is simply naive. The ICA artificially inflated prices and locked producers out, keeping prices high to the benefit of a select few -- certainly not the poor. It did not tie price with demand or quality, just the relationships of producers to those doling out the licences.
Rather than blaming the tired, corrupt ICA system for inflating prices, Oxfam has ferociously attacked corporations who buy coffee from the producers and retailers, blaming them for the low prices. By blaming excess profit, the campaign makes for good populist politics but ignores reality. The actual coffee component in your latte amounts only to between 5 and 7 per cent of the total cost, outstripped by double-digit labour and rental costs.
Fair-trade rules can actually work against poor producers. Enterprising individuals are excluded -- perhaps reflecting the dominant ideology of the movement, fair-trade coffee is only purchased from collectives.
Collectives are supposed to be established along democratic lines where individual producers trade their product as part of a collective agreement, but with a fixed price there is no opportunity to leverage higher prices. Nor is there any incentive for each producer to deliver a better-quality product when theirs is not differentiated from other collective members. Returns are distributed according to collective decision, presenting opportunities for cronyism and preferential deals based on personal and political relationships.
Despite its shortcomings, the fair-trade campaign has caught on with left-wing activists and it has become central to social-justice campaigns such as Make Poverty History.
But years after it was introduced it has failed to attract consumer support. In 2004 Starbucks' total sales of fair-trade coffee amounted to 1.6 per cent of its total coffee sales. It sells it only in 17 countries, despite operating stores in twice that number of countries. Unsurprisingly those countries are almost entirely in the developed world. An internal Oxfam Australia report shows it is worth only $2 million. Internationally it is only worth $US87 million of the total $US10 billion trade.
Using emotive language, Oxfam claims coffee companies are "exploiting Third World farmers". This is a deliberate tactic to play on the middle-class guilt of consumers in developed countries who have escaped poverty. What Oxfam ignores is that developed countries have escaped poverty because they chose the decentralised, wealth-creating free-market system. Oxfam's repackaged managed-trade system, now branded as fair trade, is the same system that has locked out the wealth-creating potential of developing countries.
Economic development for poor countries is essential. The best means to achieve it is to ensure that market-flexible, competitive industries are established to provide sustainable avenues for employment and wealth creation. When this is done countries will be able to use the wealth-creating opportunities of trade to export into rich countries.
Fair trade, or any other attempt to engineer global commerce, will not achieve this. Oxfam and other fair-trade advocates want us to focus our consumer dollar on buying from their select few collectives. They want our consumer dollar to go a shorter distance, not a longer one. The benefits will flow to these select few who get it, but it will be devastating for the people it misses. They will be the people who never got employed in a job consumers never created for failing to spread our limited resources wider.
The fair-trade campaign misses the point of why products are cheap and its "remedy" will do nothing to help the material lot of the world's poorest. The best solution to fix the state of coffee prices is to allow market forces to decide the price, not reinstitute managed trade.
Blind devotion to "fair" trade will only lock up coffee production again for the select few. As an alternative to the trade liberalisation model of development, it is sorely wanting.
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